Marqeta, Inc. (MQ) Earnings Call Transcript & Summary

Anyway, we'll get started. All right, everybody. We're going to go ahead and get started. Our timer here on the front is not up to date. So I was starting to lose track of time and so apologies for that. But we're starting -- we'll get started here. We got about 40 minutes with Simon, CEO of Marqeta. And thanks to everybody for joining us on Monday morning here at the Morgan Stanley TMT conference. Before we get started with Simon, I do have an important disclosure to read. For important disclosures, please see the Morgan Stanley Research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. So thanks to everybody for joining us, but particularly to Simon, thanks for joining us here to chat about Marqeta. Maybe we'll just start with kind of a preamble commentary. For those of you in the room that -- or online that aren't familiar with your business and how it has evolved since the company has come public. Can you give us a brief overview of Marqeta and some of the pain points, if you will, that you're trying to solve for your customers?

Sure. First, thank you so much for joining us this morning. I know you have a lot of choices, and you being here means a lot. So yes, I mean, Marqeta started in the modern card issuing space, capitalizing on all the innovation that are happening in financial services in general and then payment in particular. So about a decade ago, the vast majority of the innovation was happening on the acquiring side, with the phenomenal growth of online commerce. So we've seen a lot of innovation on acquiring, effectively integrating payments into the workflow of online commerce. But Marqeta started that innovation, that wave on the on the issuing side. So the ability to issue modern cards and offer consumers in businesses the ability to issue cards and integrate that card into the day-to-day workflow of these applications. So no question that virtual cards and Apple Pay and Google Pay or all the payments have given a huge boost for Marqeta. But the -- most of the use cases are neobanking, Buy Now, Pay Later, expense management, on-demand delivery. And last year, we've added accelerated wage access. We've added credit to help us in the embedded finance space, which is an expansion of fintech. So that's kind of how I look at Marqeta in general.

So last week, you reported your earnings and to close out 2023, you basically have 2 months of this year already in the books. But what are you looking forward to accomplish this year? Kind of what's the to-do-list we should be tracking?

Sure. The -- I would say that last year, we have revved back up the sales engine at Marqeta. And we -- our bookings were 50% up year-over-year. So the first priority is to convert these bookings into gross profit. So that's number one. Number two is, we started the work on accelerated wage access and SMB credit, which is something we were not expecting. The SMB credit was new demand that we didn't set our eye on. So that's growing big. And last but not least, so delivering on those to two. Last but not least is the new generation of co-brands, which is working with the digital brands and embedding the payment vehicle or the co-branded card into the digital workflow so that you are actually changing commerce, not just changing the payment vehicle. So we think of a card as the most adopted technology product ever built. So if you look at a payment card and think of it as a digital product, it has more distribution than Google and Facebook combined. And if you look at the frequency of use of a payment card, it is roughly in the United States, 2.2x a day for a U.S. adult. Now the most addictive digital product today is TikTok. And TikTok is used 2.1x a day, adjusted to the U.S. adult population reach. So a payment card is more addictive than TikTok. That's how Marqeta thinks about it. So if somebody at any digital brand adopts a co-brand and makes it a digital product, they have an addictive product, more addictive than TikTok. So -- and then that will contribute to the daily active users that will flow down into more sales, more advertising, more whatever they're selling. So that's a big growth area for us and a big priority in 2024.

So you talked about a lot of different things there, but I want to go to the credit component here for a minute. You recently announced two credit customers in ITS and AffiniPay. Can you talk about these deals, in what ways do you view them as being meaningful? And what can you offer these companies were -- that they couldn't really access or do before?

Sure. So AffiniPay is an aggregator, they're a platform for professional labor, which is attorneys, accountants, so on and so forth. And ITS is effectively, it's a relatively -- I mean, it's a midsized company that is -- that offer travel cards, but their customers are very, very large and very prominent. So the beauty about those two use cases we announced is actually they are completely different in use cases. So -- and what they have in common is FMB credit. And that's a segment that when we made the acquisition to add credit to our portfolio, credit program management, we anticipated the demand for consumer credit, but we never anticipated the demand for commercial credit. So that is coming to us. But the breadth and the diversity of the use cases, right, is what gives us the hope and gives us a good strategy that this is a platform. This is not a single use case that is going to be concentrated in one market segment. So between travel and attorneys, there's a nice spectrum of things we can go and repeat over time. But the core value proposition here is I'd say, serving the SMB community, because no bank wanted to touch it because they did the small- to medium-sized businesses, they are businesses, but they act more like consumers. So it's kind of like the middle that no one wanted to serve. But these platforms have great visibility into the SMB performance because they -- through the aggregators, they generate the revenue or these aggregators have great visibility into the financial performance of these SMBs, so they can help Marqeta through alternate lending or through the ability to underwrite them differently. So that's, I think, what the value proposition here is.

So how do you think about the pipeline for credit engagements between commercial and consumer? If commercial has been a little bit of a surprise, does it have the potential for you to be bigger? Or is it just additive? Like how do we think about that pipeline for commercial?

Yes. So I mean, our pipeline is growing fast on credit, in some cases, faster than we have anticipated. And the core here for us is deliver on the first few programs because we're kind of newish to credit and doing a great job. So the pipeline is mixed, but I would say that on the consumer side, we want to be very selective and be -- so we're not going to go and turn Chase Sapphire, right? That's not the goal here. I mean, maybe in 4 years. But right now, the focus is looking at the great brands, the great applications on every smartphone and making sure there is a payment card, there is a credit card embedded into the flows. So it is an engagement tool more than it is a payment tool. So that's the focus on the consumer side. On the SMB side, it is looking at marketplaces and serving the supply chain. Like you look at these phenomenal marketplaces, they all work with SMBs and all of them have cost to capital. So the marketplace goes defunct if the SMBs don't deliver. So we -- that's where our focus is. But I'd say our pipeline is mixed, there is consumer and there is commercial.

So you said a few things there, but I want to come back to those. But first, I want to kind of lay the groundwork and talk about the competitive environment. And a lot of the competition in the space seems to originate in a single-use virtual card area from the likes of Adyen and Stripe and Galileo among others. And it seems like the two biggest factors that drive these outcomes are both price and redundancy. Are you winning because you're a lower price? Or are you the backup? I think it's well understood that your offering deserves a premium price, but it also seems that given your positioning as the incumbent in the space, competitors can at least have an opportunity to take some of the volume at least from a redundancy perspective. How do you think about that? And how do you make sure that the redundancy component remains a minority of these customers where you already have position?

Sure. So I mean, let me start with the good news, is that the majority of our growth is coming from use cases where our moat is significantly higher, which is which is programs in which program management, so consumer programs mainly or SMB or many others. So where we face competition in the last, I'd say, 24 months is exactly in the single-use commercial virtual card. So that could be technically swapped. It's a onetime use. So the next time you can choose a different supplier. Right. So -- and there, I think -- I mean, Marqeta and...

And to be clear, just like the use case for people who aren't familiar, maybe this is like a Grubhub order or something like that or?

No, it's more like Buy Now, Pay Later, and I'll give you the distinction because there's something really interesting happened in Buy Now, Pay Later. But if we go with the basic use case, let's say, a Buy Now, Pay Later provider integrates into a merchant. Let's say, just as an example, Affirm and Macy's. They have an integration. And -- or Klarna and Macy's. And then you go and you see the Klarna -- checkout to Klarna on Macy's, you click and you check out. Marqeta generates a virtual commercial single-use card saddles with Macy's on behalf of Klarna, and then Klarna actually collects from the consumer over for installments. That commercial single-use virtual card is what people refer to as the area that is -- that has competition for Marqeta. Now there's two things. One is, yes, price, the second one is redundancy. But redundancy doesn't mean we lose 50% of the volume. You just need to get kind of water through the pipes for redundancy perspective. But if you look at BNPL specifically, one big area in BNPL is integration of the BNPL into a payment vehicle versus a merchant, which is BNPL everywhere. That's the market that -- where Marqeta has a much higher moat, and that's growing faster than the integration of merchants. It's now 10% of our Buy Now, Pay Later volume, which is up from something that was insignificant in 2023. So -- and that's a trend I'd say that Apple has made mainstream because in Apple Pay, there's Pay Now and then there's another tab called Pay Later. So if you look at distribution channels for Buy Now, Pay Later, used to be just the merchants, now all Buy Now, Pay Later are integrating into either a wallet or building debit cards on their own, like in Affirm or integrating into any payment vehicle. And in that space, these are consumer programs in which program management is hard to duplicate, you have some of the companies you mentioned do not play in that space, but also Marqeta has a much higher moat in that.

Got it, got it. And I want to ask on the credit side, as you said that winning Chase Sapphire maybe 4 years out or something like that. But I have to say is that it seems like the way that you've talked about the -- going after the incumbent space, if you will, seems to have improved. At least you seem more optimistic about that maybe than I would have thought 12 or 18 months ago, when you first took over the role of CEO. Can you talk a little bit about the evolution, what you're seeing there that's giving you -- that you're seeing some opportunity for traction and time to conversion that we -- could make, start to hope for?

Sure. Yes, absolutely. I mean, I'm going to use this statement. I mean, first, they ignore you, then they laugh at you, then they fight to and then you win, right? I mean if you look at the beauty of what we are doing, is making payments in general and co-brands in particular, part of the digital experience. So if you look at these gorgeous brands, whether anywhere it's from like Airbnb to TikTok to Instagram to Uber, to Instacart to all these. I mean, you look at them and you look at a banking app, it looks different. We don't need to go further than that, right? And that -- I'm not talking about visual design. I'm talking about the customer experience. So the customer experience is so unique. Everybody is focused on a great customer experience. And if that is available to the banking industry through Marqeta, then everybody wins. So -- but the -- I mean, what the fintech crowd has done and a lot of them are built on Marqeta. They've built great products. And some of them had distribution, and when distribution occurred, great things happen. But some of them did not have distribution. So our focus on embedded finance is going to the folks that have massive amount of distribution and getting the financial products embedded in that. So that's Stage 2. Stage 3 is when the banks realize, the large banks said, "Look, I like what these guys have built it's in the same business model, but delivered to consumers in the applications they love and the economics are the same." That's when I think our efforts will go towards the large financial institutions and work with them first on the commercial side, which they're facing competition today from the Marqeta customers on the commercial side, like expense management, then on co-brand and eventually their own branded cards. But that will be in the '25, '26 time frame.

And I guess...

'26...

Yes. And that's understandable. And that makes sense. But on those -- for those big banks and if they're -- if the first opportunity is to win kind of new products from within those banks, where are they in terms of being able to build the tech stacks to catch up, such that adoption of Marqeta becomes easier? I mean, do they need to start from scratch with these new products, with a new tech stack or how much can be reused from their existing? Like, what's your conversation like with them there?

So it will take time. I'd say on the commercial side, it's much easier, significantly easier on the commercial side. And that's what they're seeing, the highest pain points, because you look at the emerging, I'd say, expense management players like a Ramp or a Brex or what have you. [ Maybe ] -- Ramp -- the larger banks are facing competition from these players. And they want the same functionality that those players have and that comes from Marqeta. So their ability to do that is significantly faster than their consumer programs. The second thing I'd say is most of them do not have their own processing. They use either Fiserv, TSYS or FIS. So and the migration to Marqeta would be seamless from those players when the time comes.

Got it. Got it, got it. I've been monopolizing questions. If anybody in the audience has questions, please feel free to raise your hand. We'll get you a microphone. But I want to then go to one of the other topics that you mentioned, earned wage access initiatives on your conference call, you mentioned that there had been some accelerated wage access, volumes was growth and was up to 3% of fourth quarter TPV, which was from a basically negligible amount the previous year. Can you discuss that opportunity and what your offering is? And like how fast or how quickly or how big could that become for you?

We've been declarative, but at the same time, very excited about the space. I mean, let me start with the basics. This is a $2 trillion market. If you look at it, there's 83 million Americans that are either shift or gig workers. And they are about 7% to 10% of U.S. GDP, let's just stick to 7%. That's $2 trillion of production. And we have started offering, the accelerated wage access about a year and change ago, and the growth has been insane. I mean, one thing we didn't mention on our release, it's not just 3% or roughly, call it, 8 billion, 7 billion to 8 billion, right? It's actually 2 million families. 2 million families are now being paid instantaneously. So now while this is really good metric, it makes us feel good. It is very accretive from a unit economics perspective for us. So let's start with all the parties involved. I mean, the first one is the employer. So what they get is higher loyalty from their employees, but also that's not costing them anything because right now, if people work with the Marqeta construct, we talked about Walmart. We talked about Uber. We don't charge them anything to do payroll. I mean, payroll is not cheap when you do it on demand. It's relatively inexpensive if we do it in batch. So they had a line item on the cost side that goes to 0. And then the employee gets paid instantaneously, which is -- and that community lives paycheck to paycheck, and they're subject to 29% APRs from credit card if they can ever get credit. And on top of that, 7% inflation. So if they get paid immediately, right, that they are saved from the 29% APR. So the way we do it is, the moment -- so we put it on a card when let's say, a worker checks out of the job, they get -- we move the ledger, we don't move the money. But then whenever they go spend, that's when we actually deducted from the working capital of the company, but also pay the company the interchange that is generated from these cards. So we're creating a win, win, win situation. That's why we believe our construct will move very, very fast.

Right. So expenses, those decreased dramatically throughout 2023. And in the fourth quarter, they came in lower than at least we had expected and modeled. Can you discuss what's happening from an expense perspective? And contrast that or help level set us for where the areas of investment should be in 2024?

Sure. I mean in -- I mean I joined about a year ago and our CFO joined a few months before. And I'd say that we took a look at the expenses, and we brought down the head count of the company. But that's not the only thing we did. We've saved a lot on technology expenses, third-party costs that Marqeta was incurring. And we looked at our overall cost structure, and we've done a great job at it and continue to do so. Like, in terms of going forward, we just booted up Poland. Let me take a step back. The vast majority of our workforce is in the United States all our technology is built in the Bay Area and New York. So we have opened up Poland which is lower cost per employee, especially in risk operations, back-end engineering and so on and so forth. So that will help us get higher head count at a lower cost. So that's one. We continue to do a lot of optimization work on the technology so that we reduce the third-party technology spend. So that will help on the expense side. And the other thing I'd say is it remain laser-focused. I mean the beauty about the financial services industry is that there's trillions of dollars everywhere you look. The problem is that the curse of the fintech or the financial service industry is there's a $1 trillion everywhere you look. So you end up looking everywhere. So -- and with Marqeta, we decided, no, no, we're not going to do that. We are going to focus on the use cases and make them better. So it's discipline in spending. So the priority this year is let's get phenomenal growth in accelerated wage access. Let's get phenomenal growth in SMB credit and the co-brands. In addition to the, I'd say, the fintech use cases, which is neobanking, Buy Now, Pay Later, on-demand delivery as well as expense management. So being laser-focused to that. The last thing I'd say is, I mean, you're never done in software. You're always building, but the heavy lifting has been done, like the strength of the platform, being able to operate in the hot, hot environment, multiple data centers and be able to provide the redundancy, I mean, I think we've demonstrated when we are -- we announced last week that we crossed $1 billion in processing volume per day, and our like uptime remains in the [ 49s ] and the [ 59s ]. So I'd say the majority of this investment has -- is behind us.

And one of the metrics that you offered is proof of that improvement was the time to ramp. I think on the most recent call, you discussed that the time to ramp new deals had improved significantly, up to as much as 100 days faster than the -- in 2022, et cetera. What changes specifically has led to that improvement? And how should we think about the implications for bookings of 2023, and it's time to contribute revenue?

Sure. I mean what we guided in our Investor Day, actually had that baked in. So yes, we've done a lot of work on speeding up delivery. And I'd say the majority of that is building what I would call ready-to-use construct, but the banks would approve from a regulatory perspective. So we call them Marqeta in a box. Like a lot of the embedded finance use cases or embedded finance companies, are not fintech savvy nor financial services experts. Like, they have great ideas, but the regulators would not -- or the banks would not take on that use case. So with a small tweak, we will work with the banks and the regulators to approve those use cases. So I mean, the Silicon Valley loves to innovate. But sometimes, they never read that little -- like the nice brochure that comes with a credit card that has fine print, you need to like put something to look at it. So -- but those are important. Consumers care about those. So our ability to guide the embedded finance players into standard construct that the regulators would celebrate and the banks will take on is the #1 thing we've done. The second thing is we integrated our solutions architect with our integration engineering team into a single-threaded leadership. So they're involved early on in the sales cycle. So let's not talk about beautiful constructs that the regulators are going to reject. So from the early days of the sales cycle, we're guiding our customers towards the construct that the banks and the regulators will celebrate and that, I think, added a lot to speeding up the program launches. What we're doing this year in order to improve on this is sharing the best practices. So how do you launch a program? How do you market a new program? What are the best practices? What disclosures do you have to put? How do you incentivize adoption that, for example, rewards management? You're changing consumer behavior, like, we love rewards. I mean, the American consumers love offers. So we work to design a reward strategy. What does it mean? Same thing with small businesses. How do you translate covenants, which is a legal document into Marqeta controls? Let's say, if you want to give a credit to a small business and they go spend it on Facebook and Google for performance marketing, and they have absolutely no idea how to optimize, right? You can block that in the Marqeta. So the loan will go further and only used for supply chain management, for labor, so on and so forth. So we believe that these -- those guidelines and best practices will not change the launch time, but they will improve on the ramp time.

Got it. And then in terms of capabilities and particularly incremental capabilities, over time, there have been cases where Marqeta, which has heavily been built from the ground up. But there have been times where you've done acquisition to accelerate time to market, et cetera. How are you feeling about your current range of offerings? Are there -- should we anticipate or think about potential to accelerate time to market in different areas through acquisitions? Is that part of the strategy? Just help us think about like on a go-forward basis, that portfolio development?

Yes. I mean we think of an acquisition as a tactic not a strategy. So we are fully featured right now. I mean, with our acquisition of credit, it's kind of rounded up the Marqeta solution and look at the pipeline, the foreseeable pipeline, and we're looking good in terms of what we have. So I would say that we're going to be opportunistic, and some of the deals we'll be looking at is, I'd say, deals that only a payment geek will enjoy. So it's kind of like deep into the program management, compliance, how do you market a program in a new way versus how the financial services industry has done it before. But I would say we're very comfortable with our tech stack and our ability to respond and fulfill on the fast-growing demand for anything, we're good.

So you mentioned a couple of minutes ago, the -- at your most recent Investor Day that you'd outlined some targets. And I just want to tick through those, and then just kind of get from you a sense of where the potential variance could come from, et cetera, is that I think if I'm not mistaken, you outlined growth targets through '26. And in the '25 to '26 time frame are expecting mid-20s net revenue growth, low 20s gross profit growth, mid-single to low double-digit adjusted EBITDA margins while anticipating GAAP net income profitability by 4Q '26, and GAAP seems to be an increasingly important metric for people within this space. And look, in that presentation, I think you and the team did a fantastic job giving a detailed breakdown of potential renewal dates, price compression, et cetera. But how are you thinking about the achievability of those targets? And versus -- and where would we -- could we expect to see or potentially see variance both positively and negatively on those?

So every plan you put in place is defunct the moment you [ announce ].

That's right.

So the management team of Marqeta is all new, and we have years and decades of experience. So it's all about being -- trying to be as close to the puck as possible, and leave some room for like positively surprising investors. So a non-surprising, [ one ] beating the numbers. So there's risks and there's opportunities. But I would say from the position we are today, the opportunities are higher than the risk. But we still have made assumptions about the macroeconomical conditions remaining the same. But we feel very comfortable about the numbers we put out in Investor Day, but as a team, we're always focused on how can we move faster. And there's a lot of programs that we're working on that have the ability to move very fast, accelerated wage access, and the beauty of that construct is moving much faster than we anticipated. And honestly, it's a great value proposition. We can go replicate. The market is big. The competition is at bay. It's -- what I mean, what we built is not easy to repeat. So SMB credit is another area that is something we did not anticipate. So I'd say we have, at this stage, on SMB credit, more demand than we have supply. There are some things that could go faster. But I'd say our comfort level in the numbers we've put up is high.

Got it. Got it. And when we think about things like SMB credit and expanding credit more generally, how do we think about that as far as through a macro cycle, does that introduce more cyclicality to Marqeta's business over time or not really? Like what's your sense of [indiscernible]...

It's a great question. Great question. Look, we're new to this. And I look at that very, very carefully. And if I look at Buy Now, Pay Later, and there was a lot of concerns last year about the debt stack that this is piling up. But I mean, I hate to say, but if people look at basic arithmetics, right, the debt stack as a percentage of GDP has declined, not gone up. So -- but we don't know the distribution of that debt. So is there -- are the rich taken on more debt. And the -- effectively, the 67% of Americans are being crushed, we don't know that. But if you look at what Buy Now, Pay Later has done, right, is transaction level underwriting versus human-level underwriting. So it is significantly less risk than revolvers. So it's a great thing, and it's also opened up the credit box to, I'd say, tens of millions of Americans that did not have it. So -- and what we have seen, given that they continue to lend, the repayment schedule is very healthy. So however, we are seeing the Buy Now, Pay Later seasonality diminish because as you look at what people are using Buy Now, Pay Later for, it's not just retail and holidays, they're using it for travel, they're using it for grocery, so on and so forth. Now on the SMB side, most of the credit demand we're seeing is supplier payments. So their ability -- I mean, with the working capital at prime plus 1.5%, right? Now I would say stretching out your working capital is meaningful. So the era of 0% interest rates is gone. So I don't believe that's cyclical. That is going to be, supply chain payments is going to probably ebb and flow, but it's continuous throughout the years.

Got it. Got it. Got it. So lastly to wrap up with you, Simon, and we kind of alluded to this earlier, but sitting here today, what are your key to do and things that maybe kind of keep you up at night that you're worried about as we go into '24, and really starting to look forward to the targets that you set out for '25 and '26?

Look, I mean, I wake up every day so excited by this industry, right? Energy level is so high given the diversity of the use cases that are coming to us. I mean most of our day is spent with customers or potential customers that are the most brilliant minds in the U.S. and the innovators, this -- and we're not talking about Silicon Valley. We have brilliant people inside very large organizations that are 120 years old, that are thinking about how do you embed financial services into the workflows. I mean, big box retailers, large employers, massive digital brands that are not in financial services. So we feel very, very good about our position. I mean, to the point where the -- in the next 2 to 3 years, the way people interact with money changes completely. And the way people would interact with the payment card it is going to be how you interact with your Instagram feed, with your X feed, with your -- whatever addiction people have formed in social networking, it's going to happen with financial services. So very excited about that. Like what keeps me up at night is our ability to deliver, like we're still a small company. And some of the brands we work with are extremely well established and they care so much about their brand equity. Like, we want to make sure that we take almost no risk with these brands from a program management perspective, from a compliance perspective, from a Reg E, Reg Z compliance. We want to give them an experience that is superb without having them to worry about it and tarnish their brands because they have no financial services. So I think that's where we see our role, and then also, at the end of the day, regulators care about the consumers. And we do too. So we care about the end user consumer experience. I think that's an area that I'd say I spend a lot of time thinking about and what can we build? And where can new technology like Gen AI reduce the risk, improve underwriting, reduce the customer service burden and honestly, generate money. So we're excited about that.

Well, Simon, that's all the time we have. Thank you so much for joining us today. We're really excited, and I appreciate you taking time to be with us here at the Morgan Stanley TMT Conference.

Awesome. Thank you so much. Appreciate it.